Govt stock tenders will still be significant tool

Press, 25 January 1986, Page 22

Govt stock tenders will still be significant tool

By

MARTIN FREETH

in Wellington

The Government stock tender system, which has been the subjet of recent headlines after the SIOOM default by Rakiura Holdings, will continue to play a big role in the Government’s economic management. Borrowing requirements through the tenders are widely expected to rise in the coming year. Tenders in the present year, to end in March, will raise more than $2.58. The final figure will depend on the size of the February tender, yet to be announced. Estimates of the Governments’ borrowing requirements in 1986-87 are more than S4B. Economists at the Wellington sharebroker, Francis, Allison, Symes, have predicted a 54.58 programme. The Reserve Bank, where the programme is still being planned, confirms borrowing will top S4B. . This is likely to mean a continuation of the monthly tenders operated in 1985-86, only with larger amounts of stock being offered each time. Growth in the borrowing requirements assumes that the Government will stick to the principle of fully funding public sector spending injections through borrowing on the domestic money markets. No commentators are expecting a deviation from that because of its role as an integral part of the Government economic policy. Predictions for borrowing in 1986-87 are based on an expected jump in

the Government’s budget deficit for that year and a high level of existing Government debt maturing then also. There is some uncertainty about what the official estimates on the new year’s deficit will be. It will, however, have to absorb the cost of next October’s income tax reforms, which the Government’s economic statement of last August put at SIB. The Government could cut that by lifting the rate of goods and services tax from 10 per cent, as now intended. The prospect of a 15 per cent rate precisely to soften the fiscal impact of the tax reforms was floated by the Democratic Party leader, Mr Beetham, earlier this week. Government moves to restrain expenditure become another wild card in the pack. The Minister of Finance, Mr Douglas, indicated this month that he would be reviewing much of the public sector to look for savings in the next fiscal year. Growth in Government spending is expected to show up in this year’s accounts as the main factor behind a final deficit somewhat higher than the official estimate of $1.68. The predictions of both the political opposition and independent economists put the final deficit at between SI.BB and S2B. Treasury figures on the public accounts at the end of November show the deficit for the first eight months of 1985-86 to have been 52.998. Mr Douglas

has continued to express confidence that the seasonal inflow of tax receipts in the two months to March 31 will reverse the situation, bringing the deficit down into line with the official forecast. This year’s borrowing is based on a $1.68 deficit; a higher actual result will have to be accommodated in the 1986-87 programme. Maturing debt early this year is expected to be about $2.18, and that, too, will be added to the programme. The money market is likely to see some difference in the tender system in 1986-87. The chief manager of the Reserve Bank’s economic section, Mr Grant Spencer, said it would take a broader approach to debt sales. “Over all, the strategy will probably be more cohesive in terms of how liquidity management and the debt programme are linked,” he said. The amounts and maturity dates of stock offered at tender will apparently be set more in line with the sale of Treasury bills to achieve a more effective management of liquidity in the financial system. Mr Spencer also pointed to a new role for longerdated Treasury bills which fall outside the tighter definition of prim-

ary liquidity adopted by the Reserve Bank in December. • The new retail stock, Kiwi Bonds, would also play a bigger role in debt funding than sales of similar types of stock in the past, he said. Mr Spencer indicated that the Government would make more regular releases of informatloin to the market on the state of the borrowing programme and the deficit. The bank, the Treasury and the Minister’s office had had difficulty agreeing on what information should be released to the market during 1985-86, he said. Greater releases of updated financial statistics are likely to be well received by dealers in the money market. Heavy Government borrowing is generally accepted as the main factor in driving up the level of interest rates throughout the economy in the last 18 months. Further higher borrowing, therefore, might suggest continued pressure on interest rates. Dealers, however, say the prospect of more high borrowing in 1986-87 is already being taken into account by the market, and there is not necessarily a link between fully funding of public sector injections and high interest rates. One dealer, Mr Greg

Whitten, of Jardens, minimised the impact on rates from a large borrowing programme. A Government applying the fully funded principle was only borrowing back funds that must be available in the economy through public sector injections, Mr Whitten said. That principle was now well understood in the financial system, he suggested. Furthermore, Mr Whitten said, the Government faced no real competition, which would drive rates up, in the market for fixed rate funds.